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Tag Archives: Interest Rate

Chart: Agressive Rate Hike of U.S. Fed in 2022

Source : Wall Street Journal

Chart: Prime Rate and Bank of Canada Overnight Rate (1935 – 2022)

Source : WOWA

Chart: Central Bank Policy Rates of 10 Most Traded Currencies

Source : Reuters

Chart: Latin Central Banks Lead Interest Rate Hike Cycle

Source : FT

Global Rate Hikes Strike the Wall of Debt Maturity

Daniel Lacalle wrote . . . . . . . . .

More than ninety central banks worldwide are increasing interest rates. Bloomberg predicts that by mid-2023, the global policy rate, calculated as the average of major central banks’ reference rates weighted by GDP, will reach 5.5%. Next year, the federal funds rate is projected to reach 5.15 percent.

Raising interest rates is a necessary but insufficient measure to combat inflation. To reduce inflation to 2%, central banks must significantly reduce their balance sheets, which has not yet occurred in local currency, and governments must reduce spending, which is highly unlikely.

The most challenging obstacle is also the accumulation of debt.

The so-called “expansionary policies” have not been an instrument for reducing debt, but rather for increasing it. In the second quarter of 2022, according to the Institute of International Finance (IIF), the global debt-to-GDP ratio will approach 350% of GDP. IIF anticipates that the global debt-to-GDP ratio will reach 352% by the end of 2022.

Global issuances of high-yield debt have slowed but remain elevated. According to the IMF, the total issuance of European and American high-yield bonds reached a record high of $1,6 trillion in 2021, as businesses and investors capitalized on still-low interest rates and high liquidity. According to the IMF, high-yield bond issuances in the United States and Europe will reach $700 billion in 2022, similar to 2008 levels. All of the risky debt accumulated over the past few years will need to be refinanced between 2023 and 2025, requiring the refinancing of over $10 trillion of the riskiest debt at much higher interest rates and with less liquidity.

Moody’s estimates that United States corporate debt maturities will total $785 billion in 2023 and $800 billion in 2024. This increases the maturities of the Federal government. The United States has $31 trillion in outstanding debt with a five-year average maturity, resulting in $5 trillion in refinancing needs during fiscal 2023 and a $2 trillion budget deficit. Knowing that the federal debt of the United States will be refinanced increases the risk of crowding out and liquidity stress on the debt market.

According to The Economist, the cumulative interest bill for the United States between 2023 and 2027 should be less than 3% of GDP, which appears manageable. However, as a result of the current path of rate hikes, this number has increased, which exacerbates an already unsustainable fiscal problem.

If you think the problem in the United States is significant, the situation in the eurozone is even worse. Governments in the euro area are accustomed to negative nominal and real interest rates. The majority of the major European economies have issued negative-yielding debt over the past three years and must now refinance at significantly higher rates. France and Italy have longer average debt maturities than the United States, but their debt and growing structural deficits are also greater. Morgan Stanley estimates that, over the next two years, the major economies of the eurozone will require a total of $3 trillion in refinancing.

Although at higher rates, governments will refinance their debt. What will become of businesses and families? If quantitative tightening is added to the liquidity gap, a credit crunch is likely to ensue. However, the issue is not rate hikes but excessive debt accumulation complacency.

Explaining to citizens that negative real interest rates are an anomaly that should never have been implemented is challenging. Families may be concerned about the possibility of a higher mortgage payment, but they are oblivious to the fact that house prices have skyrocketed due to risk accumulation caused by excessively low interest rates.

The magnitude of the monetary insanity since 2008 is enormous, but the glut of 2020 was unprecedented. Between 2009 and 2018, we were repeatedly informed that there was no inflation, despite the massive asset inflation and the unjustified rise in financial sector valuations. This is inflation, massive inflation. It was not only an overvaluation of financial assets, but also a price increase for irreplaceable goods and services. The FAO food index reached record highs in 2018, as did the housing, health, education, and insurance indices. Those who argued that printing money without control did not cause inflation, however, continued to believe that nothing was wrong until 2020, when they broke every rule.

In 2020-21, the annual increase in the US money supply (M2) was 27%, more than 2.5 times higher than the quantitative easing peak of 2009 and the highest level since 1960. Negative yielding bonds, an economic anomaly that should have set off alarm bells as an example of a bubble worse than the “subprime” bubble, amounted to over $12 trillion. But statism was pleased because government bonds experienced a bubble. Statism always warns of bubbles in everything except that which causes the government’s size to expand.

In the eurozone, the increase in the money supply was the greatest in its history, nearly three times the Draghi-era peak. Today, the annualized rate is greater than 6%, remaining above Draghi’s “bazooka.” All of this unprecedented monetary excess during an economic shutdown was used to stimulate public spending, which continued after the economy reopened… And inflation skyrocketed. However, according to Lagarde, inflation appeared “out of nowhere.”

No, inflation is not caused by commodities, war, or “disruptions in the supply chain.” Wars are deflationary if the money supply remains constant. Several times between 2008 and 2018, the value of commodities rose sharply, but they do not cause all prices to rise simultaneously. If the amount of currency issued remains unchanged, supply chain issues do not affect all prices. If the money supply remains the same, core inflation does not rise to levels not seen in thirty years.

All of the excess of unproductive debt issued during a period of complacency will exacerbate the problem in 2023 and 2024. Even if refinancing occurs smoothly but at higher costs, the impact on new credit and innovation will be enormous, and the crowding out effect of government debt absorbing the majority of liquidity and the zombification of the already indebted will result in weaker growth and decreased productivity in the future.


Source : Daniel Lacalle

Chart: Hong Kong Interest Rate Surge After Fed Hikes

Source : Bloomberg and Trading Economics

Bank of England Makes Biggest Interest Rate Hike in 30 Years

Danica Kirka wrote . . . . . . . . .

The Bank of England rolled out its biggest interest rate increase in three decades Thursday, saying the move was needed to beat back stubbornly high inflation that is eroding living standards and is likely to trigger a “prolonged” recession.

The central bank boosted its key rate by three-quarters of a percentage point, to 3%, as Russia’s invasion of Ukraine has driven up food and energy costs, pushing consumer price inflation to 40-year highs. The aggressive step was expected after a more cautious half-point increase six weeks ago and matches the recent moves by the U.S. Federal Reserve and the European Central Bank.

While higher interest rates will boost the cost of mortgages and credit card debt for already-stretched consumers, the move was necessary to control inflation that has left people with less money to spend and is slowing economic activity, Bank of England Gov. Andrew Bailey said.

“If we do not act forcefully now, it will be worse later on,” Bailey told reporters, hinting he’d be prepared for more increases ahead.

The bank, whose task got tougher after former Prime Minister Liz Truss’ economic plans roiled financial markets, forecast that the British economy is likely to contract for two years through June 2024. That would be the longest recession since at least 1955, according to the Office for National Statistics.

The rate increase is the Bank of England’s eighth in a row and the biggest since a short-lived 1992 hike. It comes a day after the U.S. Federal Reserve announced a fourth consecutive three-quarter point jump.

Central banks worldwide have struggled to contain inflation after initially believing price increases were fueled by international factors beyond their control. Their response has intensified in recent months as it became clear that inflation was becoming embedded in the economy, feeding through into higher borrowing costs and demands for higher wages.

Thursday’s rate decision was the first since Truss’ government announced 45 billion pounds ($52 billion) of unfunded tax cuts, which sent the pound plunging to record lows against the U.S. dollar, pushed up mortgage costs and forced Truss from office after just six weeks.

While most of Truss’ program has been canceled, the fallout remains: Borrowing costs are higher for the government, companies and homeowners because of concerns about economic and political stability in Britain, the bank said.

Truss’ successor, Rishi Sunak, has warned of spending cuts and tax increases as he seeks to undo the damage and show that Britain is committed to paying its bills. Sunak and Treasury chief Jeremy Hunt plan to reveal their economic plan on Nov. 17.

“The most important thing the British government can do right now is to restore stability, sort out our public finances, and get debt falling so that interest rate rises are kept as low as possible,” Hunt said.

The Bank of England expects inflation to peak at around 11% in the last three months of the year, up from 10.1% in September. Inflation should begin to slow next year, dropping below the 2% target within two years, the bank said.

The squeeze on people’s incomes likely contributed to a 0.5% decline in gross domestic product in the three months through September, which may be followed by a 0.3% drop in the fourth quarter, according to the bank’s forecast.

The projections are based on financial market data suggesting the key interest rate will rise to 5.25% by the third quarter of next year. The bank’s survey of financial professionals forecasts a lower peak of 4.5%, which would shorten the recession.

Bailey said there is uncertainty about how far and how fast the bank will boost interest rates because of volatility in natural gas prices and the country’s tight labor market.

The war in Ukraine boosted food and energy prices worldwide as shipments of natural gas, grain and cooking oil were disrupted. That added to inflation that began to accelerate when the global economy began to recover from the COVID-19 pandemic.

Europe has been particularly hard hit by a jump in natural gas prices as Russia responded to Western sanctions and support for Ukraine by curtailing shipments of the fuel used to heat homes, generate electricity and power industry and European nations competed for alternative supplies on global markets.

Wholesale gas prices in the U.K. increased fivefold in the 12 months through August. While prices have dropped more than 50% since the August peak, they are likely to rise again during the winter heating season.

The British government sought to shield consumers by capping energy prices that are fueling inflation. After the turmoil from Truss’ economic policies, Hunt limited the price cap to six months instead of two years, saying the program would be focused on only the neediest households beginning in April.

That injected another degree of uncertainty into the bank’s inflation forecasts.

But the economy will recover, Bailey said.

“We cannot pretend to know what will happen to gas prices. That depends on the war in Ukraine,” Bailey said. “But from where we stand now, we think inflation will begin to fall back from the middle of next year, probably quite sharply. To make sure that happens, bank rate may have to go up further over the coming months.″


Source : AP

Chart: The Fed Is Hiking Rate Faster Than Any Time in History

Source : Chartr

Chart: Most Central Banks Raised Interest Rates in 2022

Source : Statista

Chart: Bank of Canada Hikes 75bps As Expected, Warns Rates Will Need to Rise Further

Source : Bloomberg